Final Results for the year ended 31 March 2024

31 July 2024

SysGroup plc

("SysGroup" or the "Group" or the "Company")
Final results for the year ended 31 March 2024

Well positioned for the future with a strong balance sheet to accelerate growth and innovation

Financial Highlights

·      Revenue grew 5% to £22.7m (FY23: £21.6m) driven by growth in H2 in cybersecurity

·      Recurring revenue as a % of total revenue increased to 76% (FY23: 75%)

·      Gross margin declined to 46% (FY23: 50%) due to unmitigated supplier cost increases combined with a change in product mix

·      Adjusted EBITDA¹ £2.0m (FY23: £3.1m²) driven by substantial investment in people and systems to support our new growth strategy coupled with gross margin decrease

·      Statutory loss before tax of £(6.6)m (FY23: £(0.3)m ²) driven in part by £1.8m exceptional costs (FY23: £0.4m) including upgrade of the leadership team, and £3.7m impairment of historic acquisitions (FY23: £nil), as part of the implementation of the new strategy

·      Net debt³ of £3.4m (FY23: £1.3m); increase due to payment of Truststream acquisition earn-out and settlement with former CEO

Strategic & Organisational Highlights

·      Heejae Chae acquired 14% share interest and was appointed Executive Chairman

·      Repositioned as technology partner for Small Medium Businesses ("SMBs") in their AI and digital transformation

·      Replaced 11 senior leaders (including CEO and CFO) with 6 new talents

·      Recruited an AI team of software engineers with extensive experience in ML and data architecture and a team of cloud experts

·      Rebuilding of go-to-market organisation

·      Refreshed the Board with seasoned professionals with extensive and relevant experience

·      Achieved AWS Select Tier Service Partner status (Level 2)

·      Announced a strategic partnership with Softcat to become their designated outsource partner for AI/ML offerings

Post Balance Sheet Highlights

·      Raised £11.2m in oversubscribed equity placing to fund an internal transformation project, strengthen the balance sheet to provide for ongoing working capital requirements and liquidity for acquisitions

·      Closed the second largest contract in SysGroup's history totalling £2.2m over three years

·      Progressed to AWS Advanced Tier Service Partners stratus (Level 3) qualifying for fundings and joint sales and marketing

·      Authorised as one of only two UK Zscaler Managed Security Service Partners

1)    Adjusted EBITDA is earnings before interest, taxes, depreciation, impairments and amortization of intangible assets, exceptional items, and share based payments

2)    Includes prior year adjustment.  See accounting policies note within financial statements

3)    Net debt represents cash balances less bank loans and leases liabilities

Heejae Chae, Executive Chairman, SysGroup Group, said:

"Over the past year, the Group has completely transformed its strategy, execution and leadership. Since acquiring a 14% share and becoming the Executive Chairman, we have repositioned the Company as the preferred technology partner for Small Medium Businesses in their AI and digital transformation efforts. AI will have a significant impact on businesses and represents a key opportunity for transformation. Our goal is to guide SMBs through the complex AI value chain and support their transformation journey from start to finish.

We raised £11.2 million through an oversubscribed equity raise to accelerate our growth and innovation. We have invested in additional R&D resources, including offshore capabilities in India and Eastern Europe. In order to showcase the impact of AI transformation, we are implementing 31 use cases internally to transform SysGroup to demonstrate the benefits of AI. This will allow us to serve as a live case study of best practices for our customers and achieve significant productivity gain. Additionally, we are actively seeking complementary acquisitions to expand our technical capabilities and customer base.

I am very excited about the Company's potential and future prospects.  AI will be the transformational technology of our generation and will continue to gather momentum as the technology improves and benefits are crystallised.  As with any innovation, its adoption will not be a straight line and will follow a J-curve.  Our mission is to inform and support British SMBs which accounts for 99.2% of total business population in this journey.

For further information, please contact:

About SysGroup

SysGroup plc is a managed service provider of end-to-end data solutions enabling us to take our customers on their AI data journey. The Group offers an integrated set of modern technologies that collectively meets our customers end-to-end data needs including connectivity, cloud hosting, delivery, analytics and governance of customer data, as well as a security layer for users and applications.

The Group has offices in Bristol, Edinburgh, London, Manchester and Newport.

For more information, visit http://www.sysgroup.com

Executive Chairman's statement

Overview

Over the past year, the Group has completely transformed its strategy, execution and leadership. Since acquiring a 14% share and becoming the Executive Chairman twelve months ago, we have repositioned the Company as a preferred technology partner for Small Medium Businesses (SMBs) in their AI and digital transformation efforts. AI will have a significant impact on businesses and represents a key opportunity for transformation. Our goal is to guide SMBs through the complex AI value chain and support their transformation journey from start to finish.

Trading for the year has been strong with Group revenues increasing 5% to £22.7m driven by a significant 14% increase in the second half of the year compared to the same period in FY23.  We have continued to maintain the momentum into the new financial year across all our technology offerings and, as previously announced, at the end of April, we closed the second largest contract in SysGroup's history, totalling £2.2m of revenue over three years.  Our AI/ML proposition continues to gain traction amongst both new and existing customers with a growing pipeline of opportunities. 

Our progress has also been recognised by our partners, as evidenced by our achieving AWS Select Partner Level 3 Status, approval for the Zscaler Global MSSP Program and our partnership with Softcat plc (one of UK's largest Valued Added Resellers) to be their ML partner of choice.

We have also received considerable support from existing and new investors and in June 2024 we closed an oversubscribed placing, subscription and retail offer that raised just over £11.2m; clear validation of our strategic direction and affirmation that others share our vision for the business and the next stage of its growth.  The funds raised will be used for a variety of purposes: (i) approximately £2m of the proceeds will be used to fund our internal transformation programme, referred to in more detail below; (ii) a further £2m will be used to meet the contingent earn-out payment in relation to the acquisition of Truststream back in 2022; and (iii) the remainder has left us with a strong balance sheet and given us liquidity for the M&A opportunities we are pursuing. 

We have made substantial investment in both in our IT infrastructure and people during the year and will continue to make these investments.  These include upgrading our SysCloud infrastructure with the latest hardware and enhancing our internal security architecture with a leading cloud-based security platform.  Approximately £2m of the proceeds from the recent fundraising are intended to be used to fund an internal transformation project to provide the Group with systems using AI driven technologies.  This will enable the company to be a true AI adopter and innovator, acting as a live case study of best practice to our customers.  We have completed the refurbishment of our offices to provide a positive and productive working environment whilst we continue to operate flexible working practices. Finally, we announced the closure of our Liverpool office and relocation of the registered office to Manchester with effect from 1 March 2024.

To support our end-to-end data platform strategy, we have segmented our technology into five key areas: (i) data analytics and ML (ii) data storage and management (iii) data connectivity (iv) data engineering and (v) cybersecurity.   We will invest to enhance the existing competencies organically as well as through acquisitions to fill the gaps in our technology offerings and have, for example, recruited a team of AI/ML engineers from industry leaders such as AWS, JP Morgan, Validus and McLaren.

We have significantly strengthened the senior management team, bringing together the right skillsets and mindsets. Throughout the organisation we are reinforcing a culture of customer focus and outstanding service underpinned by innovation, entrepreneurialism and high performance.

Finally, the core business, which has more than 80% recurring revenues, provides a very solid base from which we can expand, giving us very good revenue certainty and visibility whilst the investment we are making in the company will drive growth in future years. 

Strategy

Our technology strategy is to build a modern, unified data solution platform that is as simple for SysGroup to sell and support as it is for our customers to consume and benefit from.  This will comprise of an integrated set of technologies that collectively meets our customers end-to-end data needs.  It will allow for connectivity, storage, preparation, delivery, analytics and governance of customer data, as well as a security layer for users and applications.

Since my appointment I have engaged with various stakeholders including customers, employees, partners and competitors.  These interactions have provided valuable insights into both industry trends and company-specific challenges.  SysGroup is well positioned to participate in the burgeoning field of AI/ML, a technology set to redefine our era.  AI's prominence is undeniable, with daily media coverage and increasing demand for AI strategies at the board level of every company and organisation.  AI is here to stay and will be a powerful tool for those that embrace it. 

Factors driving the AI/ML adoption include:

•     The growing availability of data, crucial for training AI/ML algorithms; as the amount of data that companies collect continues to grow, so does the potential for AI/ML to deliver value.

•     The decreasing costs of computing power, making AI/ML models more accessible across varying company sizes and budgets.

•     The increasing sophistication and user-friendliness of AI/ML tools and technologies.

Our overall strategy is to position SysGroup as the go-to, end-to-end data solution provider for SMBs embarking on their AI/ML journey.  It is clear from our conversations with our customers that there is a significant gap in the market: while many SMBs are eager to adopt AI/ML, they often lack a clear strategy or implementation path.  There is a great demand for a partner to support the development of an AI/ML strategy and transition from current platforms and solutions.  According to a recent IONOS/YouGov study of 4,807 SMB owners across the UK, US, France, Germany and Spain: (i) UK business leaders have the lowest number of people already using AI frequently for work (9% compared to 15% average) (ii) only 7% of UK SMBs consider their level of AI knowledge to be very good compared to 32% in the US (iii) 48% of UK SMBs state their knowledge of the technology to be fairly poor or very poor and (iv) 56% of respondents have never used AI tools before in work, the highest percentage of the countries surveyed.  This failure to adopt is not due to a lack of desire to engage with technology and we see this as a huge opportunity for our business and its future growth.

Many providers claim to be AI/ML experts but lack the capability to provide an end-to-end solution.  Traditionally, most IT providers specialise in specific technology stacks: AI/ML strategy requires a holistic approach where the outcome is delivered from both software and hardware solutions.  We know that a significant proportion of all AI projects fail because they have not taken this holistic approach, for example, by not defining the correct business case or not employing appropriate data architecture framed by the right technology infrastructure.  Whilst gaps still exist in our offerings, we believe that we have the framework to deliver our strategy, underpinned by the relationship with our customers.

Finally, in order to build the size and scale of business we are looking to create, we will continue to explore acquisitions with the focus on (i) expanding capabilities in certain areas of technology expertise as well as (ii) acquiring companies or businesses that have interesting and relevant customer bases.  Ideally opportunities will satisfy both criteria. 

Board and Management Changes

During the financial year, we have refreshed the Board with people with significant and relevant industry experience to match the expectation and ambition of the Group. Paul Edwards joined as a Non-Executive Director in September 2023 and brings extensive plc experience as the CFO of Tatton Asset Management plc and previously Scapa Group plc and NCC Group plc.

Mark Reilly joined as a Non-Executive Director in December 2023 and is currently Managing Partner, Technology at IP Group plc.  Mark was previously a Non-Executive Director at Actual Experience plc and Mirriad Advertising plc. 

Owen Phillips joined as Chief Financial Officer in March 2024 from Matillion Limited, a leading provider of cloud data integration tools.  Owen held various financial management positions in the data/tech sector as well as working in professional practice at Grant Thornton UK LLP.

Davin Cushman joined as Non-Executive Director in June 2024 and has over 25 years of experience within the technology industry.  He served as CEO at Ignite Technologies, an enterprise software company and founded Brightrose Ventures to advise, acquire and operate software companies.

Wendy Baker was also appointed as Company Secretary and General Counsel, providing oversight and guidance on governance.  Wendy was previously at Scapa Group plc, Promethean World plc and Volex Group plc.

We have also enhanced the senior management team with the appointments of people with relevant experience from leading companies in the sector:

Paul Sullivan was appointed as Chief Technology Officer; Paul was the founder of Truststream which SysGroup acquired in April 2022.

Heinrich Koorts joined as Chief Revenue Officer from Softcat plc where he spent the past ten years in London and Bristol.

Ross Humphrey joined as the Chief AI Officer to lead our AI/ML initiative; Ross has over a decade of experience in Machine Learning as one of the UK's early adopters during his tenure at JP Morgan and Validus.

Charles Vivian joined as Director of Business Development to support our M&A strategy; Charles was previously at MXC Capital, Marwyn Capital and Freshfields Bruckhaus Deringer.

Rebecca Boyle joined as Chief People and Culture Officer; Rebecca has over 20 years HR experience gathered from large plcs such as Boots, Galliford Try and Punch Taverns and more recently was at Cawood Limited, a private equity backed buy-and-build. 

All these individuals bring invaluable experience and expertise, positioning SysGroup extremely well for future success.

Finally, we have taken steps to ensure robust corporate governance, reviewing the board and committees' Terms of Reference and establishing a new Nomination Committee to ensure that the composition and succession of the board is reviewed and reflects a balance of skills, knowledge and experience which is appropriate for the company.

Summary and Outlook

I'm enormously excited about the Company's potential and future prospects.  What gives me the greatest sense of optimism is the people within our organisation and I wish to extend my thanks to each and every one for their effort and commitment.  Our greatest asset is those people and we are building an extraordinary team.  It is my mission to ensure SysGroup becomes a place where everyone feels excited and proud to work and I am committed to creating an environment that inspires people to give their best and strive for excellence around our core values of Learning, Integrity, Kindness and Entrepreneurship.

Over the next twelve months we will lead by example, revolutionising our Company through data and AI.  We have already identified 31 transformative use cases that will significantly enhance our business operations. This is not just about adopting new tools; it's about reimagining our entire way of doing business.  We will simultaneously be carrying this approach into our customer engagements as we seek to take them on the same journey to transform their own organisations and ways of doing business.

We are on the brink  of very exciting times for both the market in which we operate and our organisation and I look forward to taking all our stakeholders on this journey.

Heejae Chae

Executive Chairman

30 July 2024

Chief Financial Officer's report

Group statement of comprehensive income

The Group delivered revenue of £22.71m (FY23: £21.65m), an increase of 5% on the prior year, Adjusted EBITDA of £2.01m (FY23: £3.13m) and a statutory loss before tax of £6.57m (FY23: loss before tax of £0.3m)

Organic growth drove an increase in revenue of 5% year on year, driven by a 14% increase in the second half of the year (compared to the same period FY23), which offset a (3)% decline in the first half.

Managed IT services revenue was £18.59m (FY23: £17.44m), an increase of 7% on the prior year, and VAR revenue was £4.12m (FY23: £4.21m), a decrease of 2%. The overall revenue mix stands at 82% managed IT services (including professional services) and 18% VAR (FY23: 81%:19%).

Gross profit was £10.40m with a gross margin of 46% (FY23: £10.9m and 50% respectively). Gross margin has fallen in part due to certain supplier price rises as well as a change in product mix, driven in particular by an increase in cyber security revenue following the continued growth of our Truststream's IT security services business, acquired in 2022, which typically carries a lower margin than the remaining core managed services offerings.

See accounting policies note 1 for details.

Operating expenses (before depreciation, amortisation, impairments, exceptional items and share based payments) of £8.39m were £0.62m higher than last year (FY23: £7.77m) as the Group underwent substantial investment in people and systems to support our growth strategy. During the year we also closed our office in Liverpool, moving the registered address to our Manchester office.

Adjusted EBITDA was £2.01m for the twelve months to 31 March 2024 (FY23: £3.13m) which is an Adjusted EBITDA margin of 8.8% (FY23: 14.5%). The lower margin percentage reflects the reduced gross margin combined with the additional operating expenses detailed above.

The consolidated income statement includes £1.83m (FY23: £0.41m) of exceptional costs which include £0.74m costs associated with the CEO exit settlement, £0.57m relating to costs associated with the restructuring of the Senior Leadership Team (FY23: £0.19m) and £0.43m relating to supplier payments in dispute.

Amortisation of intangible assets was £1.70m (FY23: £1.74m) in the year, of which £1.47m (FY23: £1.56m) relates to the amortisation of acquired intangible assets from acquisitions and £0.22m (FY23: £0.18m) relates to the amortisation of software development and licence costs.

Impairment of intangible assets was £3.72m (FY23: £nil) in the year. The Managed IT Services CGU goodwill is comprised of acquisitions dating from 2016 to 2022. Based upon a prudent assessment of the future performance of these acquisitions (being the 'Managed IT Services CGU'), management's view is that the CGU is impaired by £3.72m.

Finance costs increased in the year to £0.57m (FY23: £0.48m) relating to the loan balance at 31 March 2024 of £4.7m (31 March 2023: £4.7m), mainly from the increase in bank base rates during the period. Finance costs also include £0.11m (FY23: £0.13m) of non-cash finance charges for the unwinding of discount on contingent consideration and the amortisation of the loan arrangement fee.

The share-based payments charge of £0.19m for the year (FY23: £0.18m) relates to charges for the share options under the Executive Director LTIP and Employee Management Incentive schemes.

The reconciliation of operating profit to Adjusted EBITDA is shown in the table below. The Directors consider that Adjusted EBITDA is the most appropriate measure to assess the business performance since this reflects the underlying trading performance of the Group. Adjusted EBITDA is not a statutory measure and is calculated differently by each Company.

* See accounting policies (note 1) for further details of the restatement

Taxation

The Group has a tax credit of £0.67m this year (FY23: £0.10m) which principally arises from the deferred tax credit movement in the period. The corporation tax current credit of £0.08m (FY23: £(0.37)m charge) is as a result of R&D tax credits claimed this year in relation to the prior year. The deferred tax movement is a £0.59m credit (FY23: £0.47m credit) due to the increase in amortisation of acquired intangibles recognised in the Consolidated Statement of Comprehensive Income.

Cashflow and net debt

The Group's financial position is a net debt position at 31 March 2024 of £3.40m (31 March 2023: £1.32m). This excludes contingent consideration at 31 March 2024 of £1.75m (31 March 2023: £2.68m). The gross cash balance at 31 March 2024 was £1.94m (FY23: £4.19m). Cash balances have been utilised in satisfaction of: (i) £0.93m in the Truststream Year 1 earn-out (contingent consideration) and (ii) £1.50m in settlement of the former CEO's contractual departure terms including the Company's purchase of 2,076,394 ordinary SysGroup shares (now held in treasury) following the exercise of share options and immediate sale of those shares.

Adjusted cash generated from operations was £2.22m (FY23: £3.43m) and cash conversion was strong at 111% (FY23: 109%) which compares favourably to the target cash conversion range of 80-90%. We consider net (debt)/cash to be a KPI of the business since the level of cash availability and financial indebtedness of the Group is relevant for Board strategic decisions and a key financial measure for the Group's shareholder base and potential investors.

 ¹ Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, and share based payments

*See accounting policies (note 1) for further details of the restatement

The Consolidated Statement of Cashflows reflects a further £0.89m payment of contingent consideration relating to the acquisition of Truststream. The Company also made a further purchase of £0.76m shares into treasury, relating to the exit settlement terms of the previous CEO. The cash outflow for property, plant and equipment of £0.45m (FY23: £0.25m) includes expenditure on various office fit-outs and the payments to acquire intangible assets of £0.11m (FY23: £0.16m) includes the capitalisation of various software development costs.

£8.0m revolving credit facility

The Company continues to hold a £8.0m RCF provided by Santander in April 2022, to provide financial flexibility for acquisitions and working capital requirements. The Group drew down £4.5m of RCF funds to finance the acquisition of Truststream in FY23. There have been no further drawdowns other than interest charges.

The banking facility has a five-year term which expires in April 2027 and carries an interest rate of base rate +3.25% on drawn funds and 1.3% on undrawn funds. The bank covenants in the RCF are tested quarterly and calculated on total net debt to Adjusted EBITDA leverage and minimum liquidity. All bank covenants were met during the year.

Consolidated statement of financial position

At the year end, the Group's total net assets are £14.78m (FY23: £21.24m).

Non-current assets of £24.50m (FY23: £29.98m) include Intangible Assets of £22.66m (FY23: 27.96m) and Property, Plant and Equipment ('PPE') of £1.85m (FY23: £1.97m). There were £0.45m of PPE additions relating to office expenditure. As noted above, an impairment of goodwill in the Managed IT Services CGU of £3.72m has been recorded in the year. The remaining movement year on year relates to ordinary amortisation and depreciation.

Working capital was managed well throughout the year with debtor days at the target level of 25 days at year end and suppliers routinely paid in our monthly payment runs to agreed terms. The gross trade debtor balance of £1.58m compares to £1.71m in the previous year despite the increase in trading revenue. The prepayment balance of £1.85m (FY23: £3.10m restated) and the contract liabilities balance (i.e. 'deferred income') of £2.78m (FY23: £4.02m) have both decreased. This is due to the working capital model of the Truststream business where customers are typically invoiced annually in advance and costs from suppliers are typically received annually in advance. Accordingly, the respective income and costs are deferred on the balance sheet and recognised over the period of the contracts.

Share option grants

During the year, the Remuneration Committee granted 362,709 performance shares to Adam Binks (former Chief Executive Officer) and 204,024 performance shares to Martin Audcent (former Chief Financial Officer), in relation the Group's performance in FY23 under the terms of the 2020 SysGroup Long Term Incentive Plan. During the year to 31 March 2023, the Remuneration Committee granted 284,010 performance shares to Adam Binks and 170,406 performance shares to Martin Audcent in relation the Group's performance in FY22 under the terms of the same plan.

KPIs

The Board of Directors review the performance of the Group using the financial measures outlined below and an explanation of the financial results is provided in the Financial Review above.

* See accounting policies (note 1) for further details of the restatement

¹ Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, impairment, exceptional items, and share based payments

² Net (debt) represents cash balances less bank loans and lease liabilities

Owen Phillips

Chief Financial Officer

30 July 2024

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2024

* See accounting policies (note 1) for further details of the restatement

** Adjusted EBITDA, which is defined as profit before net finance costs, tax, depreciation, amortisation, impairments, shared based payment charge and adjusting items is a non-GAAP metric used by management and is not an IFRS disclosure

*** Adjusted Basic EPS is profit after tax after adding back amortisation of intangible assets, impairments, exceptional items, share based payments and associated tax, divided by the weighted average number of shares in issue.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2024

* See accounting policies (note 1) for further details of the restatement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2024

* See accounting policies (note 1) for further details of the restatement

CONSOLIDATED STATEMENT OF CASHFLOWS

FOR THE YEAR ENDED 31 MARCH 2024

* See accounting policies (note 1) for further details of the restatement

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2024

1.     Accounting policies

SysGroup Plc (the 'Company') is a Company incorporated and domiciled in the United Kingdom. The Company changed its registered office during the year to 55 Spring Gardens, Manchester M2 2BY. These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the 'Group').

Statement of compliance

This consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 March 2023 are an extract of the Company's statutory accounts for the year ended 31 March 2023, prepared in accordance with International Financial Reporting Standards (IFRS), approved by the Board of Directors on 23 June 2023 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2024 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on those accounts; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

These Group financial statements have been prepared in accordance with UK adopted international accounting standards ('endorsed IFRS') and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS. The Company financial statements have been prepared in accordance with Financial Reporting Standard 101 (FRS 101) 'Reduced Disclosure Framework' issued by the Financial Reporting Council (FRC). While the financial information included in this annual financial results announcement has been prepared in accordance with the recognition and measurement principles of international accounting standards in conformity with the requirements of Companies Act 2006, this announcement does not contain sufficient information to comply with IFRS and FRS 101.

Basis of preparation - Group

The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial liabilities and share based payments which have been valued in accordance with IFRS9 and IFRS2 respectively.

The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. The financial statements are presented in pounds sterling, rounded to the nearest thousand, unless otherwise stated.

Basis of preparation - Company

The Company financial statements are prepared under the historical cost convention, except for certain financial instruments that are measured at fair value. The company's financial statements are presented in pounds sterling (£), which is also the functional currency of the company.

The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates and assumptions. It also requires management to exercise its judgment in applying the company's accounting policies. Significant judgments and estimates are disclosed in the relevant notes to the financial statements.

The company has elected to take advantage of certain disclosure exemptions available under FRS 101, including:

·      A cash flow statement and related notes under IAS 7 'Statement of Cash Flows'

·      Certain disclosures required by IFRS 7 'Financial Instruments: Disclosures'

·      Disclosures in respect of the fair value of financial instruments under IFRS 13 'Fair Value Measurement'

Restatement of Cost of sales

We have identified an error relating to Managed IT services direct expenses not being recognised for the year ended 31 March 2023 within the subsidiary: SysGroup Trading Limited. Expenses were recognised as prepayments rather than in the statement of comprehensive income. The total impact of this error is to increase cost of sales by £193,678 and to decrease prepayments (shown within Trade and other receivables) by the same amount. There is no impact on comparative earnings per share as a result of this correction.

Going concern

The Directors have prepared the financial statements for the Group and the Company on a going concern basis which assumes that the Group and the Company will continue to meet liabilities as they fall due.

The Directors have reviewed the Base business forecast and a Sensitised version for the period to 31 July 2025 .

The Group raised £10.6m net funds from a placing in June 2024.  In the Base forecast there is considered ample headroom in the bank covenants, due to both the proceeds of this placing and as the business continues to operate with a high level of cash conversion and a reducing level of net debt.  In the Sensitised forecast, which includes assumptions for a significant decline in revenue and profits, the Group maintains positive gross cash balances, reduces net debt and stays within the bank covenants. The Group has a business model with a high degree of financial resilience since circa 80% of revenue is derived from contracted managed IT services which is a continuous and business critical service supply to customers. This provides a high level of operating cash generation.

At 31 March 2024, the Group had a gross cash balance of £1.9m and a net debt position excluding contingent consideration of £3.4m, excluding contingent consideration of £1.8m. The Group has a £0.5m unused overdraft facility and £3.3m of undrawn headroom in its RCF Loan facility (at the year-end date and the date of issue of these financial statements) which is available for working capital and acquisitions.

The forecasts, the resultant cashflows, together with the RCF loan facilities, taking account of reasonably possible changes in trading performance, show that the Group can continue to operate within the current facilities available to it.

The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and thus they continue to adopt the going concern basis of accounting in preparing the financial statements.

New standards and interpretations

A number of new standards and amendments to standards and interpretations have been issued during the year ended 31 March 2024. The Group has adopted all of the new and revised standards and interpretations issued that are relevant to its operations.  Other new amended standards and interpretations issued that apply to the financial statements do not impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.

New standards not yet effective

There are a number of standards and amendments to standards, and interpretations which have been issued and in some cases not yet adopted by the UK Endorsement Board that are effective in future accounting periods that the Group has decided not to adopt early. SysGroup plc is currently assessing the impact of these new standard and amendments. The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material outcome on the Group.

IFRS16 - Leases

The group has no activities acting as a lessor. The group recognises right of use assets in relation to the lease of office space and equipment.

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group's incremental borrowing rate on commencement of the lease is used. The interest rate used was 4%. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.

Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

·      lease payments made at or before the commencement of the lease;

·      initial direct costs incurred; and

·      the amount of any provision recognized where the group is contractually required to dismantle, remove or restore the leased asset (typically leasehold dilapidations - see note 18 to the Financial Statements).

The property lease rentals are fixed payments over the rental terms.

Basis of consolidation

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee; exposure to variable returns from the investee; and the ability of the investor to use its power to affect those variable returns. Control is re-assessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the Company and its subsidiaries ('the Group') as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquirer's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Business combinations

All business combinations are accounted for by applying the purchase method. On acquisition, all the subsidiaries' assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting the conditions at that date. The results of subsidiaries acquired in the period are included in the income statement from the date on which control is obtained.

Goodwill

Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortised but is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, and the fair value of contingent consideration is based on the expected future cashflows based on whether the Directors believe performance conditions will be met and thus the extent to which the further consideration will be payable. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Impairment of non-financial assets

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash-generating unit (i.e. the lowest Group of assets in which the asset belongs for which there are separable identifiable cash flows that are largely independent of the cash flows from the other assets or Groups of assets). Goodwill is allocated on initial recognition to each of the Group's cash-generating units that are expected to benefit from the synergies of the combination giving rise to the goodwill.

The estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the consolidated statement of comprehensive income. The results of foreign subsidiaries that have a functional currency different from the Group's presentation currency are translated at the average rates of exchange for the year. Assets and liabilities of foreign subsidiaries that have a functional currency different from the Group's presentation currency, are translated at the exchange rates prevailing at the balance sheet date. Exchange differences arising from the translation of the results of foreign subsidiaries and their opening net assets are recognised as a separate component of equity.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group and revenue represents the fair value of amounts received or receivable for goods and services provided net of trade discounts and VAT.

The Group has three principal categories of performance obligation: managed services, professional services and value-added resale. All customer sales are signed as contracts or orders which separately specify the services and products to be delivered and these are mapped to one of the three revenue recognition categories. The contracts or orders specify, by service and product, the sales price and the contracted term of the services. As such, the separate performance obligations and allocation of transaction price can be identified clearly from the customer sales contracts.

The revenue recognition policies can be summarised as follows:

For managed services and professional services revenue, these are recognised over time as the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Note that some contracts with customers combine a mix of managed services, professional services and value-added resale. When this is the case, performance obligations are identified and recognised in line with the policies described above.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.

Alternative profit measures

In reporting its results, the Directors have presented various alternative profit measures (APMs) of financial performance, position or cashflows, which are not defined or specified under the requirements of IFRS. On the basis that these measures are not defined by IFRS, they may not be directly comparable with other companies. The key APMs that the group uses include recurring revenue as a percentage of revenue, Adjusted EBITDA, Adjusted EPS and Net cash.

The Group makes certain adjustments to the statutory profit in order to derive many of these APMs. These include exceptional items and share based payments. The group presents as exceptional items on the face of the Statement of Comprehensive Income those material items of income and expense which the Directors consider, because of their size or nature and expected non-recurrence, merit separate presentation to facilitate financial comparison with prior periods and to assess trends in financial performance. Exceptional items are included in Administration expenses in the Consolidated Statement of Comprehensive Income but excluded from Adjusted EBITDA as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses on a consistent basis from year to year.

Financial instruments

Financial instruments are classified and accounted for, according to the substance of the contractual arrangement, as either financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.

Financial assets

The Group's financial assets comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. Trade receivables are stated at their nominal value and an expected lifetime credit loss will be recognised using the simplified approach and shown in administrative expenses in the Consolidated Statement of Comprehensive Income. Impairment reviews for other receivables, including those due from related parties, use the general approach whereby twelve month expected credit losses are provided for and lifetime credit losses are only recognised where there has been a significant increase in credit risk, by monitoring the credit worthiness of the other party. Cash and cash equivalents include cash in hand.

Contract assets

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met:

·       the costs relate directly to a contract (or a specific anticipated contract);

·       the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and

·       the costs are expected to be recovered.

These include costs such as direct labour, direct materials, and the allocation of overheads that relate directly to the contract.

The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.

Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group's ordinary shares are classified as equity instruments and are recorded at the proceeds received, net of direct issue costs. Proceeds of any share issue in excess of the nominal value of the share capital is recognised within the share premium account.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which it was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises only contingent consideration. They are carried in the statement of financial position at fair values with changes in fair value recognised in the consolidated income statement.

Other financial liabilities

Other financial liabilities include trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method.

Fair value measurement hierarchy

IFRS 9 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value to reflect the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels:

(a)   Quoted prices in active markets for identical assets or liabilities (Level 1);

(b)   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and

(c)   Inputs from the asset or liability that are not based on observable market data (Level 3).

The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels.

Share based payments

The fair value of employee options, along with any share warrants granted, is charged to the consolidated statement of comprehensive income with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes pricing model, considering the terms and conditions upon which the options were granted. The fair value of warrants is also reviewed to the extent that exercise of the warrants is considered likely.

Property plant and equipment

Items of property, plant and equipment are stated at cost less depreciation. Depreciation is provided at annual rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows:

Office equipment - 20% - 33% straight line

Motor vehicles - 25% straight line

Freehold property - 2% straight line

Right of use assets - over the period of the lease

Investment in subsidiaries

Fixed asset investments in the parent company are shown at cost less any provision for impairment as necessary.

Research and development

Research expenditure is written off to the consolidated statement of comprehensive income in the year in which the expenditure occurs. Development expenditure is treated in the same way unless the Directors are satisfied as to the technical, commercial and financial viability of individual projects, there is an intention to complete and sell the product and the costs can be easily measurable. In this situation, the expenditure is capitalised, and the amortised expense is included in administrative expenses in the Consolidated Statement of Comprehensive Income over the years during which the Group is to benefit.

Intangible assets

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).

The significant intangibles recognised by the Group, their estimated useful economic lives and the methods used to determine the cost of intangibles acquired in business combinations are as follows:

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on:

·      the initial recognition of goodwill;

·      the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

·      investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is highly probable that relief against taxable profit will be available.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either the same taxable Group Company; or different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Deferred tax liabilities are recognised on intangible assets and other temporary differences recognised in business combinations.

2   Significant accounting estimates and judgements

The preparation of this financial information requires management to make estimates and judgements that affect the amounts reported for assets and liabilities at the period end date and the amounts reported for revenues and expenses during each period. The nature of the estimation or judgement means that actual outcomes could differ from the estimates and judgements taken in the preparation of the financial statements.

Significant accounting estimates

Impairment of goodwill and other intangibles

The Group tests goodwill for impairment annually and in line with the stated accounting policy. This involves judgement regarding the future development of the business and the estimation of the level of future profitability and cash flows to support the carrying value of goodwill.

An impairment review has been performed at the reporting date taking into account sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation.  Following this review an impairment of the IT Managed Services CGU of £3.7m has been recorded (see note 13 for details).

Valuation of intangible assets acquired in business combinations

Determining the fair value of customer relationships acquired in business combinations requires estimation of the value of the cash flows related to those relationships and a suitable discount rate in order to calculate the present value.

Impairment of investments (Company)

The Company holds investments in subsidiaries. In line with the Company accounting policies investments are assessed for impairment when there is an impairment trigger.

An impairment review has been performed at the reporting date considering sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation.  Following this review an impairment of the investment in SysGroup Trading Limited of £7.6m has been recorded (see note 15 for details).

Significant accounting judgements

Revenue

Management makes judgements in determining the appropriate application of revenue recognition policies to the sale of services and products. An explanation of the Group's revenue recognition policy is included in note 1.

Assessment of CGU's and carrying value of intangible assets

A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets and the Board of Directors use their judgement to identify the CGUs of the Group. When SysGroup acquire a company, the newly acquired business is usually allocated its own CGU for the first year and until such time as either the business and assets have been hived up into the main SysGroup trading company or when the systems, finances and management of the business have been successfully integrated, whichever is earlier. For the current year, there are two CGUs, being the legacy SysGroup managed services acquisitions which operate as one CGU, and then Truststream.

Useful economic lives of intangible assets

Intangible assets are amortised over their useful economic lives. Useful lives are based on management's estimates of the period over which the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in changes in the carrying values and hence amounts charged to the income statement in particular periods which could be significant. The Group have capitalised system development expenditure in the current year and the intangible asset is being amortised over a five-year useful life which the Directors consider appropriate.

IFRS16 - Leases

Management makes judgements in their assessment of lease contract agreements to ensure the appropriate lease accounting recognition under IFRS16 - Leases. The main elements of judgement are:

·              Determining the inherent rate of interest which applies to each lease or family of leases with similar characteristics;

·              Establishing whether or not it is reasonably certain that an extension option will be exercised; and

·              Considering whether or not it is reasonably certain that a termination option will not be exercised.

Exceptional costs

The classification of costs as being exceptional, and their quantum is viewed as a key management judgement. For details of exceptional costs in the year see note 8.

3      Financial instruments - risk management

The Group's financial instruments comprise cash and liquid resources and various items such as trade receivables and trade payables that arise directly from its operations. There have been no substantive changes in the Group's objectives, policies and processes for managing those risks or the methods used to measure them from previous periods. The Group's objective is to ensure adequate funding for continued growth and expansion.

All the Group's financial instruments are carried at amortised cost with the exception of contingent consideration.  There is no material difference between the carrying and fair value of its financial instruments, in the current or prior year, due to the instruments bearing interest at fixed rates or being of short-term nature.

The Group faces a financial risk that such financial assets are not recovered but a provision is made where recoverability is in doubt.

A summary of financial instruments held by category is shown below:

Fair value of financial instruments

The Group has adopted the following fair value hierarchy in relation to its financial instruments that are carried in the balance sheet at the fair values at the year-end:

·      Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)

·              Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)

·              Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3)

The following table sets out the fair value of all financial assets and liabilities that are measured at fair value:

Contingent consideration is included in Level 3 of the fair value hierarchy. The provision for contingent consideration is in respect of the Truststream acquisition, further details of which can be found in Note 10. The fair value is determined considering the expected payments, discounted to present value using a risk adjusted discount rate.

The significant unobservable inputs were the financial performance forecasts for the Year 1 and Year 2 twelve-month periods post-acquisition and the risk adjusted discount rate of 4.0%.

The estimated fair value would increase or decrease if the EBITDA was higher or lower or the risk adjusted discount rate was higher or lower. A reasonably possible change to one of these significant unobservable inputs, holding the other inputs constant, would have the following effects:

Note that as the Truststream year 2 financial position is final, there is now no judgement in the estimated payment.

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group prepare cashflow forecasts during the month and working capital forecasts on a monthly basis. These allow the Directors to make an assessment of the cash position and the future requirements of the Group to manage liquidity risk. Cash resources are managed in accordance with planned expenditure forecasts and the Directors have regard to the maintenance of sufficient cash resources to fund the Group's operating requirements and capital expenditure.

The following table sets out the contractual maturities (representing undiscounted contractual cashflows) of financial liabilities:

The Amounts due to subsidiaries shown in 'up to 3 months' category in the table above are payable on demand (Note 17 to the Financial Statements).

Interest rate risk

The Group and Company finance their operations through a combination of retained profits and bank borrowings. The Group's RCF Bank loan with Santander has an interest charge of 3.25% above bank base rate and accordingly the interest charge the Group incurs fluctuates according to any movement in the bank base rates.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers. The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Group receives payments either from automated banking receipts or from customers paying on direct debit or 30-day credit terms. The Group has a dedicated credit control function to manage customer payments and uses an external credit rating agency to assess customers and prospects for creditworthiness. Doubtful debts are provided for in accordance with IFRS9. For cash and cash equivalents, the Group only uses recognised banks with high credit ratings of a negative or above on the Standard & Poor's rating system.

Foreign exchange risk

A small number of suppliers invoice in USD. Foreign exchange exposure is closely managed, including holding limited funds in USD. Alternate suppliers invoicing in GBP are also sought where suitable.

Capital disclosures

The Group monitors capital which comprises all components of equity (i.e. share capital, share premium and retained earnings).

The Group's objective when maintaining capital are to safeguard the entity's ability to continue as a going concern, so that it can provide returns for shareholders in future periods and benefits for other stakeholders, and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and adjusts it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

4      Segmental analysis

The chief operating decision maker for the Group is the Board of Directors. The Group reports in two segments:

·      Managed IT Services - this segment provides all forms of managed services to customers and includes professional services.

·      Value Added Resale (VAR) - this segment provides all forms of VAR sales where the business sells products and licences from supplier partners.

The monthly management accounts reported to the Board of Directors are reviewed at a consolidated level with the operating segments representative of the business model for growth of recurring contract income in Managed IT Services and VAR sales as a complementary business activity. The Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure supports both operational segments as Group functions. In this respect, assets and liabilities are also not reviewed on a segmental basis. All assets are located in the UK. All segments are continuing operations and there are no transactions between segments.

* See accounting policies (note 1.) for further details of the restatement

Assets and liabilities related to contracts with customers

The Group has recognised the following assets and liabilities related to contracts with customers: